Chapter 3, Problem 36AP

a.

To determine

Record the 10 events in general journal format of Company BC.

Explanation of Solution

Journal:

Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Record the 10 events in general journal format of Company BC as follows:

Event	Account titles and Explanation	Debit	Credit
1.	Office furniture	$12,000
	Cash		$12,000
	(To record purchase of office furniture)
2.	Prepaid insurance	$5,400
	Cash		$5,400
	(To record cash paid for prepaid insurance)
3.	Supplies	$1,800
	Cash		$1,800
	(To record purchase of supplies for cash)
4.	Cash	$39,000
	Service revenue		$39,000
	(To record cash paid for service provided)
5.	Salaries expenses	$9,000
	Cash		$9,000
	(To record cash paid for salaries expenses)
6.	Cash	$12,000
	Unearned revenue		$12,000
	(To record cash received for service yet to provide)
7.	Depreciation expense (1)	$2,500
	Accumulated depreciation		$2,500
	(To record depreciation expenses incurred at the end of the accounting period)
8.	Insurance expense (2)	$4,500
	Prepaid insurance		$4,500
	(To record insurance expenses incurred at the end of the accounting period)
9.	Supplies expense	$1,550
	Supplies (3)		$1,550
	(To record supplies expenses incurred at the end of the accounting period)
10.	Unearned revenue (4)	$9,000
	Service revenue		$9,000
	(To record unearned revenue incurred at the end of the accounting period)

Table (1)

Working notes:

Calculate depreciation expense.

$\begin{array}{c}\text{Depreciation expense = }\frac{\text{Book value }-\text{Salvage value}}{\text{Estimated useful life}}\\ =\frac{\left(\$12,000-\$2,000\right)}{4\text{years}}\\ =\$2,500\end{array}$ (1)

Calculate insurance expense.

$\begin{array}{c}\text{Insurance expense = Prepaid insurance }\times \text{Time period}\\ \text{=}\$5,400\times \frac{10\text{months}}{\text{12 Months}}\\ =\$4,500\end{array}$ (2)

Calculate supplies.

$\begin{array}{c}\text{Supplies}\text{(Adjustment) =}\text{Purchase of supplies }-\text{Ending balance of supplies}\\ \text{=}\text{\$1,800}-\text{\$250}\\ \text{=}\text{\$1,550 }\end{array}$ (3)

Calculate unearned revenue.

$\begin{array}{c}\text{Unearned revenue =}\text{Cash paid }\times \text{Time period}\\ \text{=}\text{\$12,000}\times \frac{9\text{months}}{\text{12 months}}\\ =\$9,000\end{array}$ (4)

b.

To determine

Prepare an income statement, balance sheet and statement of cash flows of Company BC.

Explanation of Solution

Income statement:

Income statement is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time.

Prepare an income statement of Company BC as follows:

Company BC
Income Statement
For the Year Ended December 31, Year 2
Particulars	Amount	Amount
Service revenue		$48,000
Less: Expenses:
Salaries expenses	$9,000
Depreciation expenses	$2,500
Insurance expenses	$4,500
Supplies expense	$1,550
Total expenses		$17,550
Net income		$30,450

Table (1)

Balance sheet:

This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Prepare the balance sheet of Company BC as follows:

Company BC
Balance Sheet
For the Year Ended December 31, Year 2
	Amount	Amount
Assets:
Cash		$47,800
Prepaid insurance		$900
Supplies		$250
Office furniture	$12,000
Less: Accumulated depreciation	2,500	$9,500
Total assets		$58,450
Liabilities:
Unearned revenue		$3,000
Total liabilities		$3,000
Stockholders' equity:
Common stock	$13,000
Retained earnings	$42,450
Total stockholders' equity		$55,450
Total liabilities and stockholders' equity		$58,450

Table (2)

Statement of cash flows:

It is one of the financial statement that shows the cash and cash equivalents of a company for a particular period. It determines the net changes in cash through reporting the sources and uses of cash due to the operating, investing, and financing activities of a company.

Prepare the statement of cash flows of Company BC as follows:

Company BC
Statement of Cash Flows
For the Year Ended December 31, Year 2
Particulars	Amount	Amount
Cash flow from operating activities:
Received cash from customers (6)	$51,000
Less: Paid cash for expenses (7)	($16,200)
Net cash flow from operating activities		$34,800
Cash flows from investing activities:
Purchased office furniture	($12,000)
Net cash flow from investing activities		($12,000)
Cash flows from financing activities:
Net cash flow from financing activities		$0
Net change in cash		$22,800
Add: Opening cash balance		$25,000
Ending cash balance		$47,800

Table (3)

Working note:

Calculate T- Accounts for 10 events.

Figure (1)

Figure (2) (5)

Calculate received cash from customers.

$\begin{array}{c}\text{Received cash from customers = Service revenue + Unearned revenue }\\ \text{=}\text{\$39,000}\text{+\$12,000}\\ \text{=}\text{\$51,000}\end{array}$ (6)

Calculate paid cash for expenses.

$\begin{array}{c}\text{Paid cash for expenses = Prepaid insurance + Supplies + Salaries expenses}\\ \text{= \$5,400 +\$1,800 +\$9,000}\\ \text{= \$16,200}\end{array}$ (7)